Written By: Blaine Malcolm, Wealth Manager | Partner
Many people hear the term Fed Funds Rate on the news or financial programs but may not know what it is or how it may affect their life. The Fed Funds Rate is the interest rate used by banks and credit unions to lend excess balances to other banks or credit unions overnight. There are several ways you may notice a change in the federal funds rate in your everyday life.
The Fed Funds Rate is controlled by the Federal Open Market Committee or FOMC, or simply the FED as you hear them referred to on TV. This is a 12-person committee that holds 8 meetings per year to determine monetary policy including the Fed Funds Rate.
For the first time in a very long time, we are faced with a rising interest rate environment, and we thought it would be a good idea to share a few things you should expect in a rising interest rate environment.
When the Federal Open Market Committee (FOMC) announces a Fed Funds rate increase, consumers can expect several things to quickly follow.
- Credit card companies will raise the interest rate charged on Credit card balances. This can have an effect on households carrying a credit card balance. During rate hikes, short-term borrowing needs will adjust quickly.
- Mortgage rates can increase. Adjustable-Rate Mortgages will now potentially have a higher reset for the rate to move to. Fixed rate mortgages you already have in place do not change, but a new fixed rate mortgage will increase.
- Savings accounts and money markets will slightly increase. Most banks will not move the savings rate up as quickly as they move the borrowing costs up. You may see very slight changes in the rates of savings accounts and CD’s.
There are also several areas that can start to slow down due to rate increases to be aware of.
- Housing starts and mortgage applications will slow down. Higher rates give people a reason to pause and take a hard look at the decision to buy a new home for their family. This can also lead to seeing home prices level off, pull back or make people rethink purchasing vacation properties.
- By now most people have at least considered refinancing their current home loan over the past 10 years, but as rates rise the opportunities to refinance your home may become harder to justify.
- Spending may slow. Consumers may slow their spending due to an increase in their borrowing cost coupled with an increase in their savings rate.
- Corporate Profitability may slow as well due to the higher borrowing costs. This can slow plans for location expansions as well as staff increases and if rates rise too high too fast it could lead to hiring freezes or even potential layoffs.
3 things to expect if the Fed Fund Rates Increase
- Credit Card companies will raise the interest rate
- Mortgage rates can increase
- Savings accounts and money markets will slightly increase
3 Things that may SLOW due to a Rate Increase
- Housing starts and mortgage applications will slow down
- Spending may slow
- Corporate Profitability may slow
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted.